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Capital inflows, crisis and recovery in small open economies

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  • Raza, Hamid
  • Zoega, Gylfi
  • Kinsella, Stephen

Abstract

We compare two small open economics, Iceland and Ireland, that experienced a capital inflow through their banking systems in the period preceding the 2008 financial crises but differ in their currency arrangements. Both countries have mostly recovered from their respective crises, but the differences in the way their economies adjusted are interesting. The evidence suggests that changes in the real exchange rate served as the adjusting mechanism for Iceland's current account while in Ireland domestic demand compression served as the main adjustment mechanism. We also explore the adjustment to the crisis in three other Eurozone economies and find that they were similar to the one in Ireland.

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  • Raza, Hamid & Zoega, Gylfi & Kinsella, Stephen, 2018. "Capital inflows, crisis and recovery in small open economies," Finance Research Letters, Elsevier, vol. 27(C), pages 273-282.
    • Handle: RePEc:eee:finlet:v:27:y:2018:i:c:p:273-282
    DOI: 10.1016/j.frl.2018.03.011
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    Cited by:

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    2. Gylfi Zoega, 2019. "Greece and the Western Financial Crisis," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 47(2), pages 113-126, June.

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    More about this item

    Keywords

    Sudden stop; Real exchange rates; Demand compression;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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